We’ve covered insane tech stock rallies, post-pandemic stock surges that have left investors, spectators and media outlets scrambling to either join the party or to make sense of the surge amid the backdrop of a weak economy.
Just last week the Fed (The United States’ Central Bank) announced that it will maintain interest rates until at least 2023, a telling confirmation of how tha pandemic has affected the global world order, but somehow tech has been having a series of moments.
It may be too simplistic to say that the rally is between the new vs. old economy, but rather, it’s a battle of the business models. In today’s Bitesize Finance entry, we’re taking you through the process of why tech has held up the index, and how Thailand fits into the brave, new world.
The Tech IPO rally
The big titans today are Amazon, Google, Apple and the likes of Netflix. During the height of the pandemic, it was the tech companies that essentially held up the index.
According to Credit Suisse, the stocks of Apple, Amazon, Alphabet, Microsoft and Facebook rose 37% in the first seven months this year, while all the other stocks in the S&P 500 fell a combined 6%.
The big 5 now constitute 20% of the stock market’s total worth, a level unseen for any one, single industry for 70 years. Apple even reached $2 trillion in market value in August, doubling what it was 20 weeks ago.
Investors are seeking agile, adaptive companies with innovative business models. The pandemic has taught us that asset light is the way to go in value creation, but interestingly enough, Tesla is asset heavy, depending on auto production and reliance on efficient factories (its new one in China, which is essentially a game changer).
Tesla’s insane stock surge though, is a whole other story. So far this year, the stock has more than doubled, even surging as far as 21% on a single day earlier this year. Some analysts say it’s the ‘short squeeze’, as it’s one of the most shorted companies with a market cap of over $10 billion. However, it’s also about investors being super bullish on the company, and thinking beyond just cars. The vision is Tesla could eventually become a dominant supplier for EV batteries and a “standard seller for autonomy” in a self-driving future.
It goes back to the same thing; investors are looking for high value creating companies, disruptors and those who are dominating categories as they go.
Explaining Snowflake
Nothing underscores the tech rally as much as the latest tech IPO – the highly anticipated public debut of Snowflake on the New York Stock Exchange just last week.
Snowflake is the year’s largest IPO, both in terms of deal size and market cap at offering. It is also the largest software IPO ever, raising over three times more than runner-up VMware in 2007. The data warehousing company was valued a high of $33.3 billion in value after its IPO, raising a total of $3.4 billion.
This company performed well this year as the pandemic forced millions of people to work remotely, fueling a trend among businesses of setting up networks on web-based platforms. Clearly, investors are betting on this trend to continue into the foreseeable future.
This makes Snowflake have a higher market value compared to Twitter ($31 billion) and Airbnb ($18 billion), and has led many to question whether or not its shares were overpriced. Critics also questioned the IPO process Snowflake used as there were opportunity costs that Snowflake had for using a Special Purpose Acquisition Company (SPAC) or blank check company to get listed.
Overall, the market is seeing strong demand for software companies like Snowflake such as Unity, a video game software company and Sumo Logic, a data-software platform.
The market’s appetite for tech only seems to be growing and growing.
The crazy thing about technology IPOs? How company valuation can soar way past revenue. In Snowflake’s case, on the first day of trading, the company’s market valuation surged by 140 times its current annualised revenues to $70 billion. Its market valuation also rose six times of what it was worth, during a private fundraising round earlier this year.
The tech-laden Nasdaq Composite Index is up 23% so far this year, far outdistancing the gains in the S&P 500, even after its recent pull back. What does this tell you? The hunger for fast growing companies in a low interest rate environment is strong.
Growth is hard to find in this environment. When you find it, you may have to pay a premium to get in the game.
Where does this leave Thailand?
Whilst global markets thrive on innovation, tech powered players and disruptive business models, Thailand’s market is seeing a more dampened sentiment.
- The biggest IPOs in Thailand scheduled for 2020-21 are SCG packaging and PTTOR, two conglomerates that have been operating for decades.
- SCG Packaging, a unit of Siam Cement, plans to raise THB39.5 billion. It’s been seeing growth with the rise of ecommerce and food delivery amid the pandemic.
- PTT Oil and Retail Business spun off from its parent, PTT in 2018 and also owns Cafe Amazon, found at essentially every PTT gas station and retail spaces.
Whilst the two IPOs will surely be in demand, considering its reach and size, it’s worth noting that both are spin-offs of established, traditional Thai companies. Therefore; there’s no new innovation or a new entry, but they have the market share and the sheer volume.
- The market for tech IPOs in Thailand is non-existent compared to the US, given the difference in size of the internet economy (USD 1.5 trillion for the US compared to Thailand’s 1.5 billion).
- However, there has been some momentum. Thailand’s leading microchip designer Silicon Craft Technology, which debuted on the Thai SET earlier in July for example, had a 200% gain on the first day of trading.
- Another tech company I&I Group, a digital and technology consulting company, is also planning to list on the MAI (Market for Alternative Investments) either this year or in 2021.
- The reason tech companies are still not as highly valued as companies with more traditional business models is because traditional companies have business models that retail investors, which make up the majority of trading volume in Thailand, can easily understand.
- What else? Southeast Asian exchanges and economies are dominated by consumer businesses, industrial products and energy sectors. Enterprise and software, especially in Thailand remains a niche sector.
- In Southeast Asia, M&As are a more common exit option for smaller companies and startups. The median size of an M&A deal is much bigger than an IPO in this region, by about eleven times.
Looking Ahead
All in all, not every country can be a hotbed for innovation or produce ten unicorns. Instead, investors should look for companies that are the disruptors of their own business models, the adaptable winners whose value will still be relevant in ten years time.
Companies that have the ability to leverage technology, that are able to digest and take action with their data will be the likely winners. Winning companies that create value for shareholders do not have to be ‘tech firms’, but instead agile companies who can leverage technology to their advantage.
In the meantime, news of potential technology IPOs from the likes of Thailand based ecommerce enabler aCommerce would be a welcome addition to the stock market, as well as inspire other companies looking for a non-acquisition exit. Not only would this be our first “startup IPO”, it would also validate Thailand’s “startup scene” and educate us about what a local tech IPO may look like.
Perhaps in the future, we’ll begin to see a mix of diversified initial public offerings that go beyond packaging empires in Thailand.
